STEP BY STEP GUIDE TO THE HOME LENDING PROCESS
Purchasing a home is a great accomplishment. In many instances, a family’s home is one of their largest and most valuable assets. It is for that reason it is important to do your due diligence and familiarize yourself with at least some of the basics when buying or refinancing a home.
Loan Smart can help you gain a better understanding of basic items such as pre-approvals, down payments, fees, and closing just to name a few.
Pre-Approval
After you have taken time to familiarize yourself with the basic home loan process, a pre-approval may be the next step in order. Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage – whether it is a home purchase, a refinancing, or a home equity loan—is a product, just like a car, so the price and terms may be negotiable.
Pre-qualification versus Pre-approval
A mortgage pre-qualification can be useful as an estimate of how much you can afford to spend on your home, but a pre-approval is much more valuable because this means the lender has actually checked your credit and verified your documentation to approve a specific loan amount (usually for a particular time period such as 90 days). Final loan approval occurs when you have an appraisal done and the loan is applied to a particular property. (Learn more by reading Pre-Qualified vs. Pre-Approved – What’s The Difference?)
- Obtain Information from Several Lenders
- Obtain All Important Cost Information
- Obtain the Best Deal That You Can
5 Things to Know When Shopping for a Home
Credit history
If you are thinking about buying a home, you need to be aware of your credit score – one of the most important factors when qualifying for a loan. A higher score can mean a better chance of getting approved for a loan and securing a lower interest rate.
Your credit report is a record of money you have borrowed, your history of paying it back and how much open credit is available to you. Lenders rely heavily on the information in your credit report as it signifies your creditworthiness and the likelihood that you will repay your mortgage.
Monthly debt
Calculating the monthly debt that a lender uses to qualify a borrower for a mortgage can be confusing. When you apply for a mortgage, lenders will review your monthly income and consumer debts, and compare them to the new house payment to see if you can afford it. Lenders use the monthly payments that appear on your credit report, so it is a good idea to review your credit report before applying for a mortgage.
The debt ratio guidelines will vary based on the loan program and aggressiveness of your selected lender. In general, backend debt ratios should be below 42%. With strong compensating factors, the backend ratio can be around 50%
Income
You can get a very rough estimate of your affordable home price range by multiplying your annual gross income by 2.5. For example, if your annual gross income is $50,000, you may be able to afford a home worth $125,000 (this varies depending on current interest rates, your debt, and credit history). If you are looking to buy a condominium, mortgage rates may be slightly higher and you will have to budget for the cost of your monthly condominium fee.
Assets and Reserves
When applying for a mortgage, a mortgage loan officer or bank will likely inquire about your assets, and more specifically, your liquid assets. They will want to know what your savings portfolio looks like in order to provide a down payment, pay closing costs, and make monthly mortgage payments going forward.
In most cases, lenders will require you to have two to six months of reserves in an account depending on the mortgage loan type you are seeking. Typically owner occupied purchases and refinances require at least two months of principal interest taxes and insurance (PITI) – second homes and investment properties will most likely require a higher amount of reserves.
Purchases
Once you have been pre-approved and are actively in the home buying process it is essential to avoid applying for any new credit. In addition, you should avoid the following until after the home loan buying process is over.
- Do not close any credit accounts
- Do not move money around (account to account) without a clear paper trail
- Do not make any late payments on any accounts
- Do not make large purchases such as a car
- Do not change jobs are pursue a career change
- Do not spend your savings
Home Loan Process Fees
Down payment
If you are in the market to buy a home, your down payment is probably top of mind. It is likely you have heard the rule of thumb that you should not buy a home unless you can put 20% down, however:
- A growing number of borrowers are putting down between 5 and 10%.
- Today, you can put down as little as 3%
Closing costs
Closing costs, also called settlement fees, will need to be paid when you obtain a mortgage. These are fees charged by people representing your purchase, including your lender, real estate agent, and other third parties involved in the transaction such as the title company, attorneys, etc.
These include:
- Government recording costs
- Appraisal fees
- Credit report fees
- Lender origination fees
- Title services
- Tax service fees
- Survey fees
- Attorney fees
- Underwriting fees
Closing costs can range but are typically between 1 and 5% of your purchase price
Insurance
When purchasing or refinancing a home you will need to familiarize yourself with at least two types of insurance: Homeowner’s Insurance (HOI) and Mortgage Insurance (PMI)
What is mortgage insurance (PMI):
Mortgage Insurance (also known as mortgage guarantee and home-loan insurance) is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer.
What is Homeowner’s Insurance (HOI):
Homeowners insurance is a package policy. This means that it covers both damage to your property and your liability or legal responsibility for any injuries and property damage you or members of your family cause to other people. This includes damage caused by household pets.
Home inspections
Before you buy a home, one of the things you should do is to have the home checked out by a professional home inspector. A home inspection is a limited, non-invasive examination of the condition of a home, often in connection with the sale of that home. A home inspector who has the training and certifications to perform such inspections usually conducts home inspections.
Inspectors vary in experience, ability and thoroughness, but a good inspector should examine certain components of the home you want to purchase and then produce a report covering his or her findings. The typical inspection lasts two to three hours and you should be present for the inspection to get a firsthand explanation of the inspector’s findings and, if necessary, ask questions.
Attorneys
In most instances, having an attorney represent your interests is not a legal requirement. However, without one, you increase your chances of being sued by the opposing party for failure to disclose certain information. That is because an attorney’s job is to review the home inspection and make certain that all relevant facts about the property (as well as any judgments or defects) are made known to the other party.
Having legal counsel makes good business sense because of the complexities that come with real estate. An experienced, competent real estate attorney can help to protect your interests and ensure that your real estate transaction adheres to the applicable rules of your state/municipality.
Closing
Closing is one of the most important parts of the process—it is when you legally commit to your mortgage loan. Click here for your mortgage closing checklist
What to bring to your closing
- A cashier’s check or proof of wire transfer for the exact amount of money you need to close.
- Your Closing Disclosure. You will want to compare it to the final documents one more time.
- A trusted friend, advisor, or lawyer, if you want an advocate at the table
- Your co-borrower or the person who is co-signing your loan
- Your driver’s license or ID.
Closing Location
The closing location can vary. For refinancing, the closing can be at your home or a place of your choosing. In most cases, closings can take place at your lenders office, the title company, or a real estate attorney’s office. Be sure to verify with your lender exactly when and where the closing will be in advance.
Extra time
Request your closing documents three days in advance of closing. By law, you must receive your Closing Disclosure three business days before closing. Take all the time you need. You have a right to read and understand your closing documents, no matter how long it takes. Trust your gut. Do not go forward until you feel comfortable.